Deutsche Bank sees Egypt’s growth prospects improving amid the Central Bank of Egypt’s ongoing easing cycle, expecting stronger domestic demand and higher investment levels coming as a result of monetary easing, the German investment bank wrote in a research note seen by EnterpriseAM.

Stronger domestic demand and more investments will drive growth over the next two fiscal years, according to the lender. Broadly in line with others, the bank sees growth reaching 3.9% y-o-y in the current fiscal year — which while representing a recovery, still remains below its long-term average due “weaker manufacturing, disruptions in the Red Sea, and fiscal consolidation.”

Economic activity posted a strong recovery of 4.3% in the second quarter of FY 2024-2025, up 2.0 percentage points from the year prior (vs. 2.3% one year ago). The main sectors that drove growth were tourism (+18.0%), non-oil manufacturing (+17.7%), communication (+10.4%), transportation (+9.4%), and financial intermediation (+11.6%), the bank wrote.

Net exports also made their first positive contribution in over a year during the quarter, adding 1.8 percentage points to real growth during 2Q FY 2024-2025. The period also saw a 0.8% recovery in investments, led by a 35.4% rise in private sector investments that offset a 25.7% drop in public investments.

But Suez Canal losses and challenges in the hydrocarbon sector could hinder growth. Shipping tonnage through the Suez Canal fell 70.0% y-o-y to 117.5 mn tons in the second quarter of the current fiscal year. In addition, the mining sector saw a 9.2% contraction in activity y-o-y, which was attributed to “lower domestic production amid declining foreign investments in new wells and reduced enhancement of existing wells.”

The bank believes that the CBE must proceed carefully with its monetary easing cycle, citing upside risks that extend beyond the rising inflationary pressures, including a “potential FX pass-through should global and geopolitical uncertainty put additional pressures on the currency” — which could manifest in something similar to the recent EM sell-off and/or forgone Suez Canal revenue, the bank wrote. Consequently, the bank expects the CBE to cut rates by an additional 400 bps for the remainder of the year, bringing the policy rate to 20.0% by the end of 2025.

Looking ahead, growth is expected to strengthen again in FY 2025-2026 to 4.5% on the back of a boost in domestic demand driven by easing inflation and financial conditions, as well as further progress on the state asset sales program, which should boost private sector investment. This puts Deutsche Bank’s forecast for the coming fiscal year in line with the governments’ targets.

Several factors could represent risks to this forecast, however. The German lender cautions that a further slowdown in global demand could lead to lower tourism levels, worsened investor sentiment, higher borrowing costs, or a rise in inflation — all of which could lower Egypt’s growth levels in the near future.

But there are also positive developments that could change the outlook for the better, including the resumption of Suez Canal traffic sooner than expected and an uptick in the country’s extraction sector. Egypt could also find itself as an unexpected beneficiary of the global trade war, with the country’s textile sector potentially attracting investors looking to bypass much heavier tariffs on textile exporter heavyweights like Bangladesh, Vietnam, and Mexico.

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